What Does the Tencent Music IPO Mean for Apple and Spotify?

Tencent music - What Does the Tencent Music IPO Mean for Apple and Spotify?

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Last week, Tencent (OTCMKTS:TCEHY) announced that it plans to sell shares in its Tencent Music Entertainment (TME) segment in the form of a U.S. IPO.

Clearly the company has seen some of the success that others have found in the U.S. lately. The most relatable is Baidu (NASDAQ:BIDU), which used a U.S. IPO for its iQiyi (NASDAQ:IQ) segment. While the company still owns a majority position in the “Netflix (NASDAQ:NFLX) of China,” Baidu was able to unlock value in its property.

IQ has done incredibly well since debuting in the U.S., while Bilibili (NASDAQ:BILI), Huya (NYSE:HUYA) and Sogou (NYSE:SOGO) have all done well too. That’s likely encouraging Tencent to come to the market with its entertainment asset.

But the bigger question is, how could that impact Apple (NASDAQ:AAPL) and Spotify (NYSE:SPOT) going forward?

Tencent Music IPO

While we know Tencent Music will come to the U.S. stock market, there are still a lot of details we don’t know about yet. We don’t know whether we’re dealing with the NYSE or the Nasdaq. We also don’t know what size the offering will be or when the IPO will happen.

However, some reports have suggested that Tencent Music could garner a valuation of $30 billion. Spotify has a similar valuation, currently trading with a market cap of $31.75 billion. Although oddly, it should also be noted that Spotify owns a stake in Tencent Music, while Tencent Music has a stake in Spotify. It’s the result of a share swap from back in December.

For its size, Tencent is oddly left out of many conversations in the U.S. investment community. That’s not a huge surprise, given that U.S. investors tend to ignore Chinese stocks because they are unfamiliar with them. However, with a market cap of roughly $500 billion, it’s similar in size to Alibaba (NYSE:BABA).

Tencent Music and Its Impact

One has to remember that, the Apple we know now basically exists because of Music. The late Steve Jobs and his love for music played a role that many investors likely forget about it. That’s thanks in part to the booming success of the iPhone. But without the iPod, which really put Apple back on the map, it’s likely the iPhone would have never came along. In any regard, Apple Music has quickly chased down other leaders in the space and is now acting as a healthy catalyst to its overall growth profile.

So where does Tencent Music fit in all of this? Apple Music is quickly making up ground in the U.S., where it just passed Spotify for the most paid subscriptions. Apple continues to gain momentum in other markets too, but neither company has the type of dominant position in China that Tencent Music has.

“China’s music market is sprinting,” according to an entertainment outlook report from PricewaterhouseCooper. The company first scooped up a few exclusive licenses on the cheap. It has since grown to include more than 200 labels — one of which includes Sony Music.

While some reports have shown lower numbers, Tencent Music reportedly has 700 million monthly active users and 120 million paying subscribers. However, while Apple Music and Spotify each charge $9.99 per month, Tencent Music and its various platforms generally cost less than $2 per month.

But the size and scope of China’s music market, littered with piracy issues in the not-too-distant past, is beyond what many investors realize. Tencent likely won’t make many inroads into the U.S., but given Asia’s size, it doesn’t need to.

The Bottom Line

Tencent Music IPO
Source: Chart courtesy of StockCharts.com

Does it matter that Tencent Music will IPO? Of course. For one, Spotify’s stake will surely become more available. As for Apple, well, the company is a juggernaut in most things that it does. While Apple would love to make more headway in China with music, it has plenty of other businesses to lean on.

It is one of the most impressive cash-generating businesses and its stock is on the verge of new all-time highs and hitting a $1 trillion market cap. On top of it, its valuation is actually reasonable, all the while Music helps drive its ballooning Services revenue.

All that said, despite the trade war worries, Tencent Music should have a welcomed IPO, whenever that may come.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he held a position in AAPL.

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Article printed from InvestorPlace Media, https://investorplace.com/2018/07/what-does-the-tencent-music-ipo-mean-for-apple-and-spotify/.

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